Bank NPAs may cross Rs 2 lakh crore as sickness in SME, farm sectors grows

There is growing expectation that loan waiver schemes will be announced in the run up to the elections slated for 2014, said Assocham.

This perception is borne out by the fact that there has been a sudden increase in non-performing assets (NPAs) in agriculture loans, coupled with drought-like situation in several parts of the country, the industry body said.

Assocham observed that while larger companies managed to restructure their borrowings by projecting improved prospects in the long-run, the small and medium enterprises (SMEs) and agriculture sector could not do the same.

The NPA ratios in the SME and agriculture segments witnessed a sharp jump, rising by 1.2-1.3 percentage points in the year ended March 2012, the industry body said in its study on ‘Growing heat of NPAs on the banking sector’.

The stressed assets in the case of public sector banks (PSBs), which were at 9.1 per cent of total advances, are likely to go up with a number of big ticket advances seeking corporate debt restructuring as the economy continues to falter, said the study.

Stressed assets

As at March-end 2012, PSBs’ gross NPA and standard restructured advances stood at 3.2 per cent and 5.9 per cent respectively.

As 15 per cent of the standard restructured advances are expected to slip into the bad loans category, PSBs’ gross NPAs would exceed 4.1 per cent in FY13.

“Not only is the NPA picture for PSBs looking bad, the restructured asset proportion is also on the rise…..PSBs may continue to be worse off.

“There is enough heat on the banks to put in place better risk mitigation as well as resource mobilisation strategy to calm down the situation,” said Assocham.

The provision coverage ratio (the provisions set aside to minimise the impact on earnings in case the NPAs are completely written-off) would fall from 53 per cent to 44 per cent, increasing the vulnerability of PSBs, according to the study’s assessment.

The growing provisioning and falling bottomline, coupled with the mandated 75 per cent NPA provision coverage, would be a challenge for the banking sector.

Public vs private banks

The asset quality of PSBs, according to the study, has sharply lagged behind that of private sector banks, which are experiencing relatively stable asset quality.

“We believe this highlights the need for further strengthening of risk underwriting and monitoring mechanisms at PSBs,” said Assocham.

The industry body said in the case of new and old private sector banks, the NPA ratios moderated in FY2012 due to their lighter portfolio of state electricity utilities, agriculture and SMEs.

Continuing pressures on the economy could see gross non-performing assets of the banking sector cross the Rs 2-lakh crore mark in the financial year ending March 2013, according to Assocham.

Gross NPAs of commercial banks had shot up to Rs 1.37 lakh crore in FY12 from around Rs 57,000 crore in FY2011, the industry body said.

Banks’ existing exposure to severely beaten sectors such as power, aviation, highways, microfinance institutions, ports, and telecom has resulted in high level of stress assets.

Further, the growing sickness in the small and medium enterprises and agriculture sector is showing signs that NPAs are bound to go up.

Pointing to the GDP growth easing to 5.5 per cent in Q1FY13 from 8 per cent in Q1FY12 and the bulging twin deficit — fiscal as well as current account— Assocham said banks are heading into a situation of rising NPAs and falling bottomline.